Back in a Bear Market
(ITM Blog Special Update)
My heading last time ‘Bad News for Bulls’ turned out to be prescient; for the last week, the market has not been kind to the bulls. After popping over the 200 day SMA briefly during the day, SPY quickly descended and resumed its downward momentum.
Last night it dropped below the bear threshold of $382 and closed at $380. The futures are negative, so at this stage it looks like the downtrend is continuing.
Bear Trade Anyone?
Which means that all the conditions for an ITMB bear trade are met (see chapter 5 of ITM: Bear Market Strategy (ITMB)). The MACD is negative, almost -3, we are below the bear threshold and the 200 day SMA, and there has been a 10/20 death cross.
Now what to buy. Chapter 6 of ITMB goes through that in detail. I have just had a look at the chain, and a 6 months to expiry (June 16,2023) has strikes that meet the criteria starting from $430.
Leverage
Remember, the further in the money you go the less leverage you have and the less risk you are carrying. Two examples:
Example 1. If you buy the $430 option for $52.22 and SPY drops another 20 points to $360 then the value of your option will be $71.19, a 36% gain. On the other hand if SPY changed direction and went up by $20 your option would be worth $37.89 a 27% loss (although ITMB rules would have got us out well in advance of this).
Example 2: If you buy the $500 option for $121.20 and SPY drops another 20 points to $360 then the value of your option will be 141.20, a 16.5% gain. On the other hand if SPY changed direction and went up by $20 your option would be worth $101.20, a 16.5% loss (again, ITMB rules would have got us out).
The choice is yours, but I can’t just leave it there without:
Cautions & Warnings
I don’t like trading at this time of year, the market is skittish going into an end of year holiday. It could be that people dump their stocks, not wanting to hold them over the holidays, which will send the market down further. But, it could be that people sitting at home see that stocks have become ‘cheap’ and do a bit of bottom-feeding. Who knows?
In Chapter 9. The Baby Bears, I discuss the situation in Christmas 2018 where SPY had only just dropped into bear territory, but that QQQ (Nasdaq) and the Dow had already rebounded and were above bear territory. This isn’t the same this time; we have conflicting messages.
QQQ (Nasdaq ETF)
QQQ has performed dismally this year, having descended into a bear market in March, then popping up again only to reenter it late April. Apart from a brief holiday in August it has stayed there since, and is now down 33% for the year.
The Dow
The Dow climbed out of bear territory (up 20% from its lows) at the end of November, but only very briefly. While it looks like it is heading down again it is still well above the bear threshold, which is a cautionary sign for us.
All very interesting – but what should we do?
If you want to do a bear trade, then the set-up conditions have been met. It is up to you to choose the strike and the expiry (at least 6 months) and how much you are going to risk on this trade. Don’t bet the bank!!
If you choose to go ahead with a bear trade, then remember to monitor it every day; bear markets move much faster than bull markets. As soon as you see the MACD histogram popping over the midline then it means that the bears are no longer in charge, and you need to exit. Check In The Money: Bear Market Strategy for details of everything I have been talking about here.
Backtesters
Thank you so much to all the people who volunteered to backtest. I’ve already had quite a few confirmations that the first tranch of figures are correct, but there are a few spreadsheets that I have been sent with different figures and I need to go through them. I will get the next lot of figures out soon! And thank you to everyone, it is really wonderful to have such support.
So here we go . . .
I will post if there are any more signals that need to be acted upon.
OK, if you’re up for it, let’s do it!
Heather
Oops, I forgot . . .
Thank you to Ron for reminding me that I had left out the ITM bearometer! (I just thought of that name – what do you think?) Here it is:
And one last thing:
I was looking for a particular book on Amazon, and came across this. Made me laugh, had to order one, here’s the link if you like it too: Traders’ Emotions TShirt.
(Disclosure: I get 1% of the price if you use the above link. Now what shall I do with that 17 cents?)
(Images by Hans-Jurgen Mager Unsplash)
3 Responses
A polar bear’s fur is so efficient at retaining body heat that the bears are practically invisible when viewed with infrared cameras and night-vision goggles.
Love the Bearometer. Heather do you remember another time, bear market, where the signals did not work?
I wonder if the algorithmic traders are taking advantage of the widespread believe in the death cross and golden cross. When a technical indicator is widely used does it cease to be useful?
As always, I thank you for the generous sharing of you work. And I wish you a peaceful holiday and a prosperous New Year.
Another test. Didn’t realise you had to include the comment widget every single post. OK, will remember in future.